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CAPM Homework Exercise 8




Question;Financial;Concepts;Portfolio;Theory, CAPM Homework;Homework;Exercise 8;Rate of Return;Year;Asset A;Asset B;Market;1;20.0%;19.0%;9.0%;2;-11.0%;22.0%;12.0%;3;10.0%;-6.0%;6.0%;4;-9.0%;-14.0%;-4.0%;5;21.0%;28.0%;17.0%;For this exercise, you might want to copy;and paste the table above into Excel and then do all your calculations on that;spreadsheet.;1);Calculate the expected returns;for Asset A, Asset B and the Market (use;Average function in Excel);Asset A =;Asset B =;Market =;2);Calculate the standard deviation of returns,?, for each asset (use STDEVP function);Asset A =;Asset B =;Market =;3);Calculate the correlation,?, between Asset A and Asset B (use CORREL function in Excel);? =;4);Calculate the expected returns;from the following portfolios;Use the following formula to calculate the;portfolio standard deviation;?P =? (wA?A)2 + (wB?B)2 +(2 wA;wB?A?B?(A,B));=(((wA*?A) ^ 2) + ((wB*?B)^2)+(2 *wA*;wB *?A *?B *?(A,B))))^.5;Where wA;andwBare the % of assets in Asset A and B;respectively;?A and?B are the;respective standard deviations of return;and;?(A,B)).is the correlation of;returns between asset A and B;Portfolio Expected Return;Portfolio Std Dev.;% Asset A;% Asset B;0%;100%;25%;75%;50%;50%;75%;25%;100%;0%;5) Using Portfolio Expected Returns on the Y axis and;Portfolio Standard Deviation in the X axis, draw the efficient frontier for;possible portfolio combinations of Asset A and B. (include 100% A and 100% B as two possibilities). Hint;Use the Excel Chart Wizard and select the XY(scatter) plot option);6);Calculate Beta for Asset A (relative to the Market) and Asset B relative;to the Market) (use SLOPE function);Beta;for Asset A =;Beta;for Asset B =;7);Assume that for next year the;Risk Free Rate is expected to be 2% and that the overall Market will realize a;return of 12%. Using the CAPM / SML methodology, calculate the required;returns for Asset A and Asset B.;Required;Return for Asset A =;Required;Return for Asset B =


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